Globalization, Liberalization & Privatization is all over the place. There is no denying that it is one of the most irreversible of all the changes that had sequestered this last decade from the rest. In a moment I shall qualify the statement why I say this process as irreversible, but the fact of the matter is that globalization has affected not only the economies of all the nations, whether developed or under-developed, but also it has affected the lives of billions of people the world over. The important point however is to learn from some of the lessons that some of the economies of the world had taught us and may be also take into cognizance some attributes that some of the successful companies have learnt and delivered.
There is economics behind globalization, we know, it has stemmed from the need to grow beyond the boundaries posed by the limits of markets on one side and to counter the apparent sluggishness in the matured markets and economies and its related impacts. When we say markets it includes the Capital markets as well which also go through the same woes of sluggishness and cycles of crests and troughs, maturity problems. But it is not one- way traffic. For every developed economy there is always a far less developed one, which can be invested in, grown, developed. And the world is truly heavily unbalanced in this regard. There is economics behind growth since without it there is only one way to go, perish. There are many empirical examples wherein it can be proved that if an economy cannot achieve the desired growth rate it runs into many problems like unemployment, poverty, inflation, trade imbalance, currency devaluation, budget deficits, social problems and unrest including riots. We can see this in the light of the organizational experiences also. A company, which cannot attain the desired growth rate, will have to achieve twice the cost reduction (it had originally planned) in order to get to the same bottom line. Without a robust top line growth the bottom-line growth have never come. There are of course exceptions like HLL but how far this can be sustained is another.
While there is a need for Globalization felt by the developed economies there is a far more compelling need already bubbling in the developing economies, the need to get developed, to discard the shackles of artificial boundaries created to stifle the entry of ideas, goods, services, innovations, Capital inflows, technology and most of all, competition. Development at rapid pace would require all these things to flow in and maybe all at the same time, with only one economic criterion, that the primary result will be that commodities and services will be available to people at a rate, which is less economical otherwise. This however assumes markets to be free and fair, where prices of commodities will be guided by supply and demand and not by cartels.
The positive side of Globalization can be seen around us as more and more commodities in numbers as well as in quality have become cheaper and available to more people. There has been rise in aggregate demand and to cater to that capacities have been expanded and despite inequalities the incomes have grown. The economies are no more just dependant on domestic demand and boost in Exports have brought about the shift in the trade deficits thus making the economy less volatile to externalities. Standards of living have surely improved and so has general health of people. Access to knowledge, thanks to development in I.T., has helped the developing nations to equip themselves to take on competition in every segment of life.
Critics have however pointed out the discontents too, which have to be seen in the light of failed self-limiting prophecies of World Institutions like IMF (who have since the turn of the new millennium reformed for the better) who have forced upon some of the developing nations the “shock-therapy”, which in absence of other supporting structures like transparency in governance, legal institutions, other democratic instruments and processes, have crumbled some of the economies, raising inflation, interest rates, making the exchange rate far more volatile. All this has resulted into lowering of GDP (for example China had a GDP which was 60% that of Russia in 1990, which has now reversed at the turn of the century) and forcing people into poverty. This has been the case with Russia, East European and some of the South East Asian economies, which have been forced into economic recession. Poverty has also not come down but actually increased (in 1990, 2.718 billion people were living on less than $2 per day, in 1998 the number is estimated at 2.801 billion, refer World Bank, Global Economic Prospects in Developing Countries, 2000) but not in India (where people below the poverty line has gone down from 37% to 28% in the same period). The complete, unfettered, “super-fast” relaxation of Capital controls in these developing economies have attracted the “speculative money” to do wonders with the economy, and have at the end resulted in the “Capital flight”, making the economy stripped to its last remains. The “beggar-thy-neighbor” trade agreements on the other hand have brought to the fore the hypocrisy of the more developed nations who have continued with the subsidy in some of their key produces like agriculture to protect it from far more cheap exports moving from the developing economies while at the same time have crusaded for lowering of tariff barriers in those products that face similar fate when exported by the developed to the developing. World is still today not a level playing field. Perhaps it will never be.
The Indian experience however has been different. It could have been better, but it is good that at least it has not taken the turn as in Argentina, or Thailand, or Russia or Indonesia. It has not been like China or South Korea, but all that is for a different reason. The reason it has not been like the worst examples is because it had somebody else in the driver’s seat (no matter what we may say about it’s under performance) and not the World Institutions like IMF. It had taken the cautious path. It had democratic institutions in place and the processes including the legal system to support and oppose. It went into the game in steps, which the economists say the “gradualist” approach. Thus the results were verified before major changes came into effect.
But more importantly it had the entrepreneurship of the rising Indian Business firms at the helm of things. This I would mention as the single most important factor that has led to the “difference” over any other factor. The industry Captains have led the process of change and they have done it knowing fully well where to focus on and where to take guard against.
The outstanding work done by some entrepreneurs in the manufacturing sector and in the service sector (which saw an unprecedented growth and today accounts for 46.8% of the Indian GDP) have changed the course of Indian competitiveness. What was Indian competitiveness like before the Globalization started? Or is it that we came to know about what competition means when all this started?
Let’s just look at one segment, the car segment. We did not know how to make cars, we did not have roads to ply them, we did not have enough money to buy them and we did not know how to make them economically. We did not know how to make them also means that we did not have the ancillary industry in place. We did not have the rolling mills to produce the cold rolled coils for the car bodies; we did not even know how to make good nuts and bolts and washers. And we did not know how to continuously make them far more economically and continually bring down costs. The car paint industry, the tyre- industry and the after sales service went through a big change coping with these new requirements, the radiators required far more efficient heat transfer capability, and the electrics went through a sea change. What started off in the Maruti shops near Gurgaon has today taken the economy by a storm. But the central theme behind these has been the core issue of “competition”. The markets rejected the old economy models, not only because they were more costly, but also because they failed to deliver what the consumer wanted in many ways. The Ambassadors and Fiats, the only brands that plied on the roads of India before globalization started, simply went into a dying mode.
There is lesson to be learnt from the Indian entrepreneurs Tata Steel and Telco in this regard. The crisis in the South East Asian economies and the general lowering of Steel prices had affected them for a brief period, but they saw the opportunity in the passenger car segment and they jumped to grab it. Today they have made a remarkable turnaround, something to boast of as an Indian. And all this when there were a dozen car manufacturers from all over the world who came overnight to capitalize on a free market suddenly opened up. Both in Steel as well in cars there are not many examples of such rapid change. The answer lies in their ability to be more competitive, cut costs and deliver value. Similar examples can be taken in the service sector, particularly in I.T. The point also needs to be noted that the government quite rightly gave the right incentives for growth, like reduction of indirect taxes that helped to fuel demand or tax-shield for I.T. exports that attracted investments.
Let me take the example of the Aluminum Industry, from which I come and the changes in the Indian Aluminum Industry, also is mind-boggling. This industry in India has a compounded Year on Year growth rates in excess of 7% but more importantly the export growth in this industry segment is more than 20% year on year. This is remarkable considering Globalization and this is a perfect example of how the Indian Entrepreneur has reacted to the changes in the environs. We shall also see how people, who were involved, enabled, empowered, brought about these changes and how it became a shared responsibility for all.
But it all started with strategic initiatives, which has a lot to do with vision. The Aluminum Industry in India started off with the Aluminum major ALCAN, setting up shop in India, here near Kolkata, at Belur, where I work. They started off with rolled products for which they imported the primary metal. Later on they made the first smelter in India and then the first Extrusion Plant. They made expansions both in the upstream as well as the downstream to integrate a value chain starting from Bauxite mining to value added products.
There was another Indian entrepreneur who had a far bigger dream. He had started late but he saw the bigger picture only too early. He knew that the answer lay in developing economies of scale and in developing far greater competencies in Cost.
He was Mr.G.D.Birla. He laid the foundations of a great Indian opportunity in Aluminum, Hindalco. He made it in a scale that had the backbone in the fundamental raw material, Power. He made his power plants so efficient that today Hindalco is one of the cheapest producers of Aluminum in the whole world. He selected the best people around him and handed over the mantle to the great entrepreneur of this century, Mr. Aditya Vikram Birla.
If we look at how this enterprise had developed its core competencies around its processes and people we will be able to fathom that we are truly dealing with the best in the world. And today if there are any world-class plants in India that not only is world class in terms of technology, but also in terms of cost, it is Hindalco. And today when we talk of threats of globalization, the only example that comes to my mind is that in India actually the reverse took place in Aluminum. A global player like Alcan was taken over by an Indian player, Hindalco in India.
Hindalco produces power at the rate of Re.1 per unit, the international benchmark for power. It’s power plants are old, some of them long fully depreciated, but it has been the competency of its people which has made the change.
I had started by saying that it all starts with the vision of a legendary leader. It also starts with his true entrepreneurial spirit, to beat the best, to grow beyond the stretches, to achieve what no body had dared to achieve.
The second most important issue is one of organization. It not only means that the right people have to be put at the right places but it also means that reinforcements have to be provided to fill up gaps and a strong network has to be leveraged to provide people with access to knowledge and create an open and fair atmosphere where people can exchange ideas.
Innovation holds the key. It is not really technological innovation only. People have to strive for continuous learning in the organizational set up, share successes and only then each element of the process chain will get strengthened. Today this is the biggest challenge. To be able to make the organizational processes as flexible as possible so that with the changing needs of the market the processes can be fast aligned to deliver the strategic objective.
Labor is not a problem. It is a challenge. We in Aluminum have never seen labor unrest. Labor to us is a means to achieve the desired objective. It is only through the strength of the labor that most of the good work has been possible in Aluminum. And this is true any where in the world and labor has to be seen as an asset, only if we can utilize it to deliver the best productivity.
Productivity is a very central issue in the context of competitiveness and Globalization and it has come to the fore after the rest of the things have been taken care of, like corporate governance, strategic initiatives, creating a learning organization or managing capital and credit better. The benchmark figures are appalling. The difference with the others is awfully tilted on one side. Let me give some examples.
Let me take one measure of productivity, that is, per capita value addition per year. In the case of Electronics Industry in India it is as low of 30% of the global benchmark, for Aluminum it is 85%; in I.T. it is perhaps 150%. This shows our competitiveness. Although dollar may be an imperfect comparator but that is what will guide the investment decisions. It tells us two things: the capital return ratios and the human contribution to wealth generation are far more inferior in India when compared to the rest of the South East Asian economies. Whereas there are again areas where we are better than the rest of the world.
Let us concentrate on the second, human contribution to wealth generation. In the global environment today it is not good enough today to talk in terms of technology upgrades. It can be bought if a firm can generate adequate wealth. The problem is utilization of this technology by the people or leveraging and innovating to deliver better than the others.
The problem in our case starts with the basic education itself. And the education that our workers receive before joining work does not limit that. What happens after he gets enrolled in a firm? Is he made part of the entire team that makes the company?
The days of manufacturing is gone, it is mento-facturing now, in which each and every employee of the firm have to be enabled to think, create, and innovate. Otherwise the kind of cost reductions or reduction in wastage that India needs to achieve across all the industry segments can never be achieved.
Let me now sight some examples how we at the Indal Belur plant have tackled some of these problems in our firm.
Our core problem was that we were in a monopoly sector due to tariff barriers, which protected us on one side and due to huge capital investment required for start-ups in Aluminum, there were not many players. So we prospered through ‘rent-collection” till the 1994 by raising our prices through a “cost plus” approach since demand always outstripped supply. As the markets opened up more and more imports started and domestic competition also increased with capacity increase. We realized that we had to reduce costs.
The first step was to do a SWAT analysis, to know our strengths, weakness, opportunities and threats. We found that our fundamental problem was the standards and norms set for productivity, which limited the actual potential of a worker. For example the norm was to work for 5 ½ hours in an 8- hour shift and take rest for 2 ½ hours. On top of that every machine produced an output that was based on a “standard” that was negotiated with the Unions and it only got changed after an LTA was signed after protracted negotiation.
We simply did away with this system of “rest”. We abolished the “standards” and “norms”. It took us two years to make the people understand why we needed this to be implemented. It was not the unions alone with whom we discussed, we involved each and every worker. The result was that every machine got re-manned with a crew, which was shorter by 30% than the original strength. It was risk to abolish “standards” of production or the “quota”. But actually we found that the per capita productivity jumped by 100% in some key equipment.
We did not limit ourselves to these alone. We knew that unless we involved every worker in the quality processes that govern the business we would be making only ornamental changes and there had to be incentives given so that a worker understood what it meant when a defective material got shipped out. We introduced a variable pay package for the workers that had inbuilt incentives for lesser “sales return” from the market. The major driving force was however the final throughput of the plant.
The workers actually knew that there was no sense complaining about things that limited their output. They actually saw to it that these problems got solved. The output jumped 30% year-on-year, the Sales return came down by half and delivery performance improved from 50% to 85%. And they also focused on costs, power productivity in particular, which improved 33% in a two- year span.
But all these changes required an environment created by management so that cross-functional teams work on problems continuously. The old feudal organization where there were departmental barriers was scrapped and a team based organization evolved where every goal was aligned.
Global India will require global vision; make every job a twenty-four hour job, so that no business or learning opportunity goes a begging. Quality will depend on quality of people primarily who will make the changes that have to be gone through, with pain but with heart.
There is huge gap still with South Korea and China. While Korea has grown primarily through Exports, China has grown through the expansion of its domestic markets; the major drivers have been high worker productivity (not IT enabled only like U.S.) and transformation of its state sector enterprises into world- class companies. It depends on entrepreneurs and managers, which way we want to go.
It is a tremendous opportunity for change either way.
Procyon, 18th February’03